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Sitio Royalties Second Quarter 2022 Results

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   |    Tuesday,August 09,2022

Sitio Royalties Corp. announced operational and financial results for the quarter ended June 30, 2022.

Highlights:

• Average daily production volume of 12,402 barrels of oil equivalent per day, (52% oil), up 9% sequentially from 1Q 2022; pro forma average daily production volume of 15,149 Boe/d (50% oil) including Falcon Minerals volumes for the entire second quarter 2022
• Net income of $72.0 million, up 87% sequentially from 1Q 2022 and cash flow from operations of $43.8 million, down 2% sequentially from 1Q 2022
• Adjusted EBITDA of $76.7 million³, up 29% sequentially from 1Q 2022 and Discretionary Cash Flow³ of $75.5 million, up 29% sequentially from 1Q 2022
• Pro forma Adjusted EBITDA of $92.7 million and pro forma Discretionary Cash Flow of $91.4 million, including Falcon Minerals results for full 2Q 2022
• Declared 2Q 2022 dividend of $0.71 per share of Class A Common Stock⁴; implied annualized dividend yield of 10.3% based on STR's Class A Common Stock closing price of $27.55 on August 5, 2022
• 126.8 net producing wells online as of June 30, 2022 including net wells on acquired acreage from Momentum Minerals
• Including activity on the acquired acreage from Momentum Minerals, 5.2 net wells turned-in-line during 2Q 2022, approximately 88% of which were in the Permian Basin
• Including net line-of-sight ("LOS") wells on acquired acreage from Momentum Minerals, 26.8 net LOS wells as of June 30, 2022, comprised of 14.4 net spuds and 12.4 net permits, with approximately 94% of total net LOS wells in the Permian Basin⁴
• Completed all-stock merger with Falcon Minerals Corporation ("Falcon Merger") for over 34,000 net royalty acres and cash acquisitions of approximately $357 million for an additional 22,000 NRAs
• Signed agreement to acquire 12,200 NRAs from Momentum Minerals, which closed in July of 2022

Chris Conoscenti, Chief Executive Officer of Sitio commented, "We are excited to announce strong results for our first quarter as a public company. Active operator development of our assets, incremental royalty revenue from acquired assets, and favorable commodity prices contributed to a successful inaugural quarter. We continued to execute well on our large-scale, Permian-weighted consolidation strategy. This was our most active quarter in our Company's history with the closing of the Falcon Merger, the closing of the acquisition of Permian assets from Foundation Minerals, LLC ( the "Foundation Acquisition") and two other all cash acquisitions, and the announcement of the Momentum Acquisition. In aggregate, these acquisitions increase our footprint by 65% to over 173,000 NRAs. In addition, I'm pleased to announce our inaugural dividend of $0.71 per share for the second quarter, which is based on cash flow for legacy Desert Peak Minerals and Falcon Minerals as if both entities had been combined for the entire quarter and is not burdened with transaction fees from the Falcon Merger. Our second quarter dividend per share is nearly 99% of the split adjusted dividend per share that was paid to Falcon Minerals stockholders for the first quarter of 2022, even though our target payout ratio of 65% of Discretionary Cash Flow is lower than Falcon Minerals' historical payout ratio of approximately 100%, which gives Sitio significantly more financial flexibility to protect the balance sheet and pursue accretive acquisitions."

Operational Activity & Acquisitions Update

During the second quarter of 2022 and inclusive of the NRAs acquired from Momentum Minerals, the Company estimates that there were 5.2 net wells turned-in-line with an average net royalty interest ("NRI") of 0.7% and that as of June 30, 2022, there were 26.8 net LOS wells comprised of 14.4 net spuds and 12.4 net permits on the Company's acreage. Daily production volume averaged 12,402 Boe/d, which includes 24 days of production from assets acquired from Falcon Minerals and 7 days of production from assets acquired from Foundation Minerals, LLC. Second quarter 2022 pro forma combined daily production volume averaged 15,149 Boe/d including production from assets acquired from Falcon Minerals for the entire quarter but excluding additional adjustments for assets acquired in other acquisitions.

Sitio completed the all-stock merger with Falcon Minerals on June 7, 2022 and closed three all cash acquisitions during the second quarter of 2022, increasing NRAs by approximately 56,300. In June of 2022, the Company also signed a purchase agreement for approximately 12,200 Permian Basin NRAs from Momentum Minerals for approximately $224.0 million⁵, which closed on July 26, 2022. In aggregate, these acquired assets (including those acquired from Momentum Minerals) are expected to make a substantial impact to near-term production and cash flow, and as of June 30, 2022, these assets acquired from Foundation Minerals and Momentum Minerals had 9.0 net LOS wells, comprised of 3.4 net spuds and 5.6 net permits.

Financial Update

Sitio's second quarter 2022 average unhedged realized prices including all expected quality, transportation and demand adjustments were $109.87 per barrel of oil, $6.55 per Mcf of natural gas and $42.29 per barrel of natural gas liquids, for a total equivalent price of $76.65 per barrel of oil equivalent. During the second quarter, the Company paid $420,000 in net cash settlements for commodity derivative contracts and as a result, average hedged realized prices were $109.35 per barrel of oil, $6.49 per Mcf of natural gas and $42.29 per barrel of natural gas liquids, for a total equivalent price of $76.28 per barrel of oil equivalent. This represents a $12.90 per barrel of oil equivalent, or 20% increase relative to hedged realized prices for the three months ended March 31, 2022.

Consolidated net income for the second quarter of 2022 was $72.0 million, an increase of 87% relative to the first quarter of 2022. Consolidated net income was positively impacted by a $20.4 million non-cash hedging gain from Sitio's commodity derivative contracts. For the three months ended June 30, 2022 Adjusted EBITDA was $76.7 million, up 29% from the three months ended March 31, 2022 primarily due to increased production volumes and commodity prices.

As of June 30, 2022, the Company had a cash balance of $15.6 million, $505.0 million of total debt (comprised of $255.0 million drawn on its revolving credit facility and a $250.0 million 364-day unsecured term loan) and liquidity of $60.6 million. In July of 2022, the Company drew an additional $175.0 million on the 364-day unsecured term loan and $10.0 million on the revolving credit facility to fund the closing of the Momentum Acquisition. Sitio is evaluating long-term debt financing options to repay the $425.0 million 364-day unsecured term loan. Sitio added hedges related to recent cash acquisitions, which are reflected in the summary table of Sitio's commodity hedges.

2Q Dividend

The Company's Board of Directors (the "Board") declared a cash dividend of $0.71 per share of Class A Common Stock for the second quarter of 2022. The dividend is payable on August 31, 2022 to all eligible stockholders at the close of business on August 18, 2022. Based on a 65% payout ratio of second quarter 2022 Discretionary Cash Flow, Sitio's quarterly dividend would have been $0.58 per Class A common share; however, the Company's Board of Directors approved a 2Q 2022 dividend of $0.71 per Class A common share, which equates to an approximate 65% payout ratio including pro forma Falcon Minerals Discretionary Cash Flow for the full three months ended June 30, 2022.